Question

"IN 1991,AS AN IMMEDIATEMEASURE TO RESOLVE THE BALANCE F PAYMENT CRISIS,THE RUPEE WAS DEVALUED AGAINST THE FOREIGN CURRENCIES.THIS LED TO AN INCREASE IN THE INFLOW OF FOREIGN EXCHANGE."
HOW DOES IT LEAD TO AN INCREASE IN THE INFLOW OF FOREIGN EXCHANGE?

Answer 1

Hi

First of all, let us understand the meaning of devaluation of Indian Rupee.

Consider the two exchange rates
1 US $ = Rs 40 (1.1.2015)
1 US $ = Rs 50 (2.1.2015)

When the same amount of goods (1 US $) are purchased by paying extra Indian Rupees (Rs 10 extra), such a situation is known as 'Devaluation of Indian rupee'.

Now, consider this situation from US point of view, by paying 1 US $ earlier they used to get goods worth Rs 40 and now the same dollar fetch them goods woth Rs 50. Thus, they would like to buy more and more.
Hence, when India suffered from Balance Payment crisis and the value of rupee is devalued, foreign exchange reserves increases.

Hope this clarifies your doubt.
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